Ocado Will ‘Continue to Face Meaningful Headwinds’ – JPM

Ocado shares closed Tuesday’s session down over 2% after JPMorgan placed the stock on ‘Negative Catalyst Watch” and cut its price target for the online supermarket to 400p from 450p, maintaining an Underweight rating.

The investment bank said OCDO’s online grocery activities will “continue to face meaningful headwinds in the next months,” adding that the latest Kantar data suggests ongoing market share gains for offline discounters due to the current macro backdrop. 

Kantar reported Tuesday that UK grocery inflation edged lower for the third straight month. The data analytics firm said in the four weeks to June 11, annual grocery inflation was 16.5%, down from 17.2% in its May data.

In addition, JPM analysts noted that higher inflation-driven average selling prices are nearly fully offset by smaller basket sizes, while cost inflation is negatively impacting UK retail’s bottom line.

“With Ocado’s UK Retail operations barely profitable in 2023, we see limited scope for Retail to act as the required showcase for the company’s Solutions operations,” said JPM. The firm’s analysts also feel it is becoming clearer that the shift towards more customer fulfillment centres will remain slow for supermarkets, with in-store picking solutions preferred.

Despite Ocado’s strong share price decline, down 49% YTD,  JPM believes the current levels still reflect a further 54 customer fulfillment centres to be announced, and with a lack of new partnership announcements likely to remain the key share price driver from here, the firm “see risk-reward still as unattractive vs other names in the EU Internet sector.”

Our tracking of Twitter mentions, a sign of consumer demand rising or falling, shows chatter about Ocado has remained subdued for the last few months. 

By James Fyeman